Protecting The Seller In Seller Financing: 3 Things Every Seller Should Do

Avoid Default: Seller Financing Transaction

Key Takeaways:

  • If a buyer defaults the foreclosure process in Texas can be as quick as 42 days and less than 60 days.
  • Due On Sale Clause may be a clause the seller’s lender may call if they see a deed transferred. Make sure your buyer has a plan in place if this occurs.
  • If you are seller financing and you want to accelerate the time to realize the bulk of your principal you can sell your note to another mortgage company.

Seller Financing or selling a house subject to the existing loan can have a lot of advantages especially when facing specific scenarios or having a difficult time selling their property. That being said most sellers weren’t planning on being a lender when they set out to sell their home so we want to help you consider some of the top risks involved in selling your house in a wrap, sub 2 or seller finance transaction.

What If The Buyer Defaults On Their Payments?

One of the biggest fears sellers face in selling their home in a seller finance transaction is what if the buyer defaults on the payment? This thought can feel overwhelming when you don’t work on a daily basis as a lender. Here are our top tips for engaging your buyer and what to do if this happens to you in Texas.

  • Qualify Your Buyer: Make sure they have a plan on how to purchase your home and they know a title company or servicing company they can use to help do these transactions.
  • Legal Protection: Make sure an attorney is preparing the documents and helping you with the closing. You want to make sure that the buyer is legally committed to following through on the promis. NO HANDSHAKE DEALS!
  • Secure the property with a Deed of Trust so that you can foreclose in the event of default. Foreclosures in Texas are quick and can occur in under 60 days! Because foreclosures are Non-judicial it is a lot less work than other states and is simply a process of filing the paperwork and proof to begin the process.

What Happens If My Lender Calls The “Due On Sale” Clause?

Within each loan there is typically a clause that says that if the property is sold to another individual the bank has the right to call that property “Due on sale”. At that point all of the remaining balance is accelerated and typically a bank asks it to be repaid in 35 days. This situation can get really sticky if you sold your house to a buyer subject to the existing lending or with a wrap mortgage. So what do you do in that scenario as a selle? Make sure your buyer has a plan. Ask them up front what will you do if the lender calls my loan due?

  • Talk to the lender. The lender may see the new buyer is in better standing and may allow a loan assumption or give another way to keep possession and keep the loan in place. Keep in mind the bank does not want a foreclosure. Foreclosures are expensive and they are incentivized to work with you.
  • Refinance: The buyer can use different types of loans to refinance their position out of the loan you have. Common loans that can perform quick are hard money loans or personal loans.
  • Sell The property: Depending on the equity in place the buyer may be able to sell the property and pay off the loan in time.
  • Deed Transfer or Lease Back Options: In some states there are options to deed the property back to the original owner with a way to return the property to the future buyer at a future date. It is important to talk to a real estate attorney in your state when exploring these options to ensure it is done legally.

Regardless of the fact that this clause is only an option the lender has and it is rarely called there are options to work with in the event the clause is used by a lender. Keep in mind banks don’t like foreclosures so they are usually incentivized to work with you as long as they are getting paid.

It’s My Money And I Want It Now!

One of the concerns for seller financing or a wrap mortgage is that a life event may come up in a couple of years that all of the sudden requires you to have access to that money that you have locked up in principal. As a lender you no longer own the property however you do own a financial asset that has a lien on that property and that financial asset (the loan) can be sold to another lender. You may not know this but most loans are bought and sold in an open market between banks and you can sell your loan just like they do! When you sell your loan you walk away with cash in hand.

Let us know if you have any questions on how to structure a seller finance transaction in Texas. We love helping people get deals done!

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